For plan years beginning after 2013, the Affordable Care Act (ACA) institutes
so-called market reform provisions that place a whole host of new restrictions on
group health plans. The penalty for violating the market reform restrictions is a
punitive $100-per-day, per-employee penalty; or $36,500 per employee, per year. With
a limited exception, these new market reform provisions significantly restrict an
employer's ability to reimburse employees for premiums paid on individual health
insurance policies, referred to as employer payment arrangements.
Employer payment arrangements
Under employer payment arrangements, the employer reimburses employees for premiums
they pay on their individual health insurance policies (or the employer sometimes
pays the premium on behalf of the employee). As long as the employer (1) makes the
reimbursement under a qualified medical reimbursement plan and (2) verifies that the
reimbursement was spent only for insurance coverage, the premium reimbursement is
excludable from the employee's taxable income. These arrangements have long been
popular with small employers who want to offer health insurance but are unwilling or
unable to purchase group health coverage.
Unfortunately, according to the IRS and Department of Labor (DOL), group health plans
can't be integrated with individual market policies to meet the new market reform
provisions. Furthermore, according to the DOL, an employer that reimburses employees
for individual policies (on a pretax or after-tax basis) has established a group
health plan because the arrangement's purpose is to provide medical care to its
employees. Therefore, reimbursing employees for premiums paid on individual policies
violates the market reform provisions, potentially subjecting the employer to a $100
per-day, per-employee ($36,500 per year, per employee) penalty.
Limited exception for one-employee plans. The market reform
provisions do not apply to group health plans that have only one participating
employee. Therefore, it is still allowable to provide an employer payment arrangement
that covers only one employee. Note, however, that nondiscrimination rules require
that essentially all full-time employees must participate in the plan.
Bottom line. While still technically allowed under the tax code,
employer payment arrangements, other than arrangements covering only one employee,
are no longer a viable alternative.
What should you do if you still have an employer payment plan?
First of all, don't panic. You are not alone. The impact of the market reform
provisions to these plans has come as a great surprise to many small business
employers, not to mention the tax practitioner community, and we believe there is
reasonable cause to keep the penalty from applying for earlier payments. However, it
is important to discontinue making payments under the plan and rescind any written
documents. Also, any reimbursements made after 2013 should be classified as taxable
Because of the ACA market reform requirements, employers are basically precluded from
subsidizing or reimbursing employees for individual health insurance policies if
there is more than one employee participating in the plan. Employers can, however,
continue to do any of the following:
- Provide a tax-free fringe benefit by purchasing an ACA-approved
employer-sponsored group health plan. Small employers with 50 or fewer employees
can provide a group health plan through the Small Business Health Options Plan
(SHOP) Marketplace. A cafeteria plan can be set up for pretax funding of the
employee portion of the premium.
- Increase the employee's taxable wages to provide funds that the employee may use
to pay for individual insurance policies. However, the employer cannot require
that the funds be used to pay for insurance - it must be the employee's decision
to do so (or not). The employer can claim a deduction for the wages paid. The
wages are taxable to the employee, but the employee can claim the premiums as an
itemized deduction subject to the 10%-of-AGI limit (7.5% if age 65 or older).
If you have any questions, please give us a call.
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opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2015